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How to Rebuild your Credit Score after Insolvency

06 March 2018 - Posted by TalkAboutDebt

Going through insolvency will never be easy – between choosing the right solution and managing many months of tight budgeting it can be an extremely stressful experience. On top of this, formal insolvency solutions such as IVAs, Trust Deeds, and bankruptcy, can have a significant impact on your credit score. This can push your financial goals further into the future, by making it difficult to obtain more credit once your insolvency has been discharged.

Luckily, there is plenty you can do to rebuild your credit score, and avoid encountering more problems with debt in the future. Below we outline some of our top tips for rebuilding a good credit score – and keeping it!

Carefully check your Credit Report

One of the first actions you should take after being discharged from an insolvency is to request a credit report. This can be had from one of the UK’s three credit reference agencies: Experion, Equifax, or Callcredit, and usually only costs a few pounds.

Check your report closely to ensure there are no mistakes – even a small inconsistency in your address can put potential lenders off. It is also vital to ensure that all the accounts covered by your insolvency solution are listed as settled. If they are not accurately listed, you should get in touch with either the creditor themselves or the reference agency, and ask that the details are amended.

Don’t avoid Credit Entirely

Encountering problem debt is enough to discourage anyone from taking on more credit, but a blank credit history is just as off-putting to lenders as a poor one. In order to build up a reliable credit history, you must use credit.

One good way to do this is to take out a credit-building card. These credit cards are designed to help people with poor credit histories improve their credit scores, and tend to have low spending limits and high interest rates (usually around 30% APR). Because of these high interest rates, it is important to pay your bills on these cards in full whenever possible, hence avoid paying interest entirely. Using the card for day-to-day spending, and paying it off in full every month, will gradually provide you with a reliable payment history.

Give it Time

As you are doubtless aware, rebuilding your credit score will not happen overnight. The more time that has passed since you were discharged from your insolvency, assuming you are taking steps to demonstrate your credit-worthiness, the better your credit score will be. The information on your credit file stretches back six years, and once your insolvency ‘drops off’ the file, obtaining credit will become far easier. Simply paying your bills on time consistently will gradually bolster your credit score, especially in conjunction with a credit-building card.

Handling Credit well

Although using a formal debt solution will lower your credit score, so will consistently defaulting on payments. Taking action to clear your unmanageable debt is always better than ignoring it in the long run, especially since it affords you protection from creditor harassment. Going through an insolvency procedure will offer you a fresh start, and another chance to reach your financial goals.

Consider what Credit you apply for carefully

Although using credit is vital to rebuild your credit score, applying for multiple lines of credit in a short space of time is not advised. This can begin the dreaded ‘rejection cycle’. If a person is rejected from a credit card application, they may hurry onto the next one – this is a bad idea, since applying for credit appears on your credit file, and if you have been rejected, other lenders will also be able to see this, and be less likely to lend to you themselves.

The best way to avoid this cycle is to do plenty of research before applying for credit. Look at the eligibility criteria carefully, and try using Money Saving Expert’s Credit Card Eligibility Calculator. Using the calculator will not affect your credit score, and lets you know how likely you are to be accepted for various credit cards before you formally apply, so you can make an informed decision.

Avoid the Minimum Payment Trap

When using a credit-building card – or any source of credit – the key to managing your debt effectively is to avoid falling into the trap of only making the lowest possible payments each month. Although this might seem to be saving you money in the shrot-term, you will actually end up paying far more in interest overall, not to mention the fact that clearing the balance will take years longer.

Staying within your credit limit is also vital – this demonstrates to lenders that you are capable of good financial planning, making them more likely to trust you with further, and more substantial credit in the future.

Do not withdraw Cash on Credit Cards

Making cash withdrawals on a credit card can also raise red flags to potential lenders. This is because it can indicate that a person is desperate for ready money, and may be risky to lend to. Additionally, withdrawing cash with a credit card incurs a fee, which can quickly add up, so is worth avoiding.

For more information about how to deal with debt, and what you should bear in mind when choosing a solution, contact an advisor at Talk About Debt, by calling 0808 156 7730.

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